Objectives: The main objective of this chapter is to provide students with wider scope of business strategies. The main focus here is, naturally, on sustainability strategies. The short introduction in the beginning focuses on the very basic global problems that influence corporate strategy planning as well as a kind of a paradigm shift that strives to describe the development and relationship of societal thinking and environmental management. Due to the growing need of reducing energy and material consumption the role of services is shortly discussed from both, from the dematerialization and environmental requirements as well as from value creation point of view. In addition, naturally, different strategic options are introduced.
Contents: Change in thinking - a paradigm shift, dematerializing by services, strategic analysis from the sustainability point of view: a) basic strategies including SWOT analysis and analysis of business environment, b) competition strategies including environmental costs strategies, environmental differentiation strategies and mass-markets, market development strategies, and blue ocean strategies; integration of corporate sustainability strategy in everyday life of companies, gaining competitive edge by implementing CSR-strategy, business value of CSR-strategies.
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Chapter Ehtics of Care discusses several crucial problems – as well from the environmental as from the social and societal point of view – that the weaknesses and shortcomings of the current economic system have brought us to. Based on the facts that we are already exceeding the capacity of the earth, polluting and destroying the planet, destroying the possibilities of future generations, and actually also of the current one, too, living in developing or undeveloped countries, to fulfill their basic needs by consuming drastically more nonrenewable resources than would be our share etc., we have come to the conclusion that we cannot go on like this any more. Something has to be done. We must not forget, either, that in the name of globalization the gap between the rich and the poor has rather increased than narrowed which, in turn, has caused a variety of all kinds of social problems like forced labour, sweat shop working conditions, unfair competition against the huge multinationals and so on. The list is long. At the same time we must find solutions and answers how to fight the climate change as well as how to adapt to it.
From the viewpoint of natural resources the current situation could be described as a global crossroads where the demand of different resources is rapidly increasing, whereas the amount of the very same resources is declining. The idea is described in the picture below:
The natural resources here refers not only to the peak oil that has been described in WP2, but also to all kinds of nonrenewable resources like other fossil fuels, minerals etc that will be consumed sooner or later, or at least, whose extracting will become more expensive and whose price will therefore rise when the natural reserves decline. Estimations of the available resources vary, so do the forecasts of their prices, but the point here is that this kind of resources do not regenerate. One example of the estimated resources of fossil fuels as well as of the price development of them could be described as in the following pictures:
Report of International Energy Agency 2008.
Prices of oil and other fossile fuels are discussed in more detail in WP 2. Therefore here just one example of the price development.
One of these declining resources is also clean water. Water crises are more closely been described in WP2, that is why it is only mentioned here, not described any further.
The other aspect of the global cross roads concerns the growing demand of different resources. Reasons are many. One issue is the fast growing population, others could be e.g. the demand for improved standard of living, especially in emerging economies, as well as growing industries, especially in emerging markets again, and the demand for constant growth in general. It has often been said that the expectations or requirements that developed countries should bring their know-how concerning cleaner technology, or at least sell it for a reasonable and affordable price, have all failed. On the contrary, one of the biggest problems here is that developing or undeveloped countries cannot at the moment afford clean technology without help from the developed world, and, in addition, numbers of materials and technologies which are forbidden in developed countries because of their harmful, even fatal impacts on local environment and/or people, are sold to poorer countries where the legislation is looser.
There are numbers of examples of efforts and intentions to solve this contradiction of growing demand and decreasing amount of different resources. Some of the examples come from technology like renewable energies, energy and material efficiency, so called clean technology, closed loop production systems etc. Others come from the business side like for instance recycling business, more sustainable products and services, replacing physical products by different services etc. But because they all are introduced and described in more detail elsewhere the focus is now shifted to the main point of this chapter, to the different strategies companies can implement when striving for better responsibility – either social or environmental or both – performance. First, however, a change in thinking, in other words a kind of a paradigm shift, will be introduced to (hopefully) provide a better understanding of the background issues that have, or at least should have, their affect also on the strategic decision making of individual companies and corporations.
The current era, or time period, can be determined and described with different words. Some call it information society, others prefer the name network society. The term Information society is usually used to describe a society where the economic importance and power of information industry exceeds the role of traditional physical production. More and more people are employed by by companies producing, handling and providing different kinds of information. The other definition, network society, in turn, refers to the development of the economic situation where companies outsource their activities and build complex but flexible networks to meet the rapidly changing requirements of their customers. Thanks to the solutions of information technology these networks do not have to be local or even national anymore, but they can be extended to all parts of the world. Extreme examples of this could be companies, whose designers or engineers work in different parts of the world in shifts so that when the working day in India ends, the working day of another designer or engineer of the same company continues the same task in Romania and after that the same task is developed further e.g. in America. Other impacts of complex networking and longer supply chains are the declining role of national legislation and authorities and, on the other hand, bigger possibilities of companies to place their activities in countries with cheaper production costs and, for example, looser environmental and/or social legislation. On the other hand, however, environmental impacts, for example, are not any more seen as local problems but both, local and global. The same is the case concerning social issues. Due to e.g. the awareness and requirements of stakeholders (e.g. authorities, customers, media, private consumers etc.), rapid information transfer and the growing role of the media, companies cannot concentrate only on their own behavior and performance or local environmental and social impacts any more. Instead, they have to expand the focus to the whole life cycle of the products and the whole supply chain. In addition to the traditional meaning of the product life cycle from cradle to grave, which very often used to mean waste, nowadays the focus has to cover also the so called end-of-life products and different options of product recovery. (See chapter Gaining Competitive Edge by Product Recovery.) This means, in turn, that the basic aim of industries, which used to be to produce as much as possible regardless of the resources needed, has been shifted to the idea of producing more but with less resources, that is in a more efficient way. In other words, the focus is being shifted from less limited material consumption into efficient use of energy, water and different materials. (Willenius 200x.) Willenius divides the modern time into three time periods: before the 70s, between the 70s and ca. 2020 and after 2020. The picture below describes these time periods as well aas the logics of action typical for each time period. The second shift, from the middle one to the third period, will be described later on in this chapter.
Typical for the industrial society was, as mentioned before, to produce as much as possible. Environmental problems were regarded as local phenomen and companies tried to solve them by improving their production procedures, e.g. by so called end-of-pipe technology. Different kinds of environmental management systems were developed to control the production and to meet legal requirements. After the oil crises in the 70s, more attention to oil consumption had to be paid. The focus that had earlier been on production and on individual companies and factories was expanded to cover the whole life cycle of products. Improvements concerned not only the production but very much also the product development. From the environmental point of view the primary goal was to increase the eco-competitiveness of the product.
Declining resources, waste problems, growing worry about the climate change etc. with all their consequences have strengthened the requirements, as mentioned before, to expand the life cycle thinking to cover also the end-of-life phase. These aspects are partly regulated by modern legislation and national as well as international authorities. One example of authority requirements concerning end-of-life products could be the producer responsibility required by EU authorities, which obliges the producers to take back certain end-of-life products. In Finland, for example, this obligation concerns e.g. car tires, batteries, electronics etc. In the same way pharmacies are obligated to take back unused medicine. On the other hand, as described in the chapter Reverse Logistics, different models based on product take back and recycling are at the moment one of the rapidly growing industries worldwide.
Life cycle thinking has largely effected also business thinking. First, as mentioned in several occasions earlier, one of the main goals of companies that are willing to improve their social and/or environmental performance is to make profit and to gain competitive edge. Whether this is a sustainable or an acceptable basis for making business, can be discussed and argued (see wp2), but it is, however, often the reality. Second, a lot of new businesses and service producers have been emerged based on different options of product recovery. According to the EU recommendations, product recovery options should be preferred in the following order: 1. reuse of the product for the original purpose, 2 repair and maintenance, 3 reuse for a new purpose, 4 reuse or recycling of parts and components, 5 recycling of materials and last, 6 use the product to produce energy. As it can be seen in the recommendation, the goal is to produce no waste to landfills at all but reuse products either as products or, at least, as an energy source.
Eston and Winston (2009) regard these product recovery options as traditional priorities and group them into reuse and recycle. The third aspect they include in traditional priorities is reduce which can refer to two aspects, reducing material and energy use as well as reduce of consumption. This idea of new consuming patterns brings us to the second part of their pollution reduction model called new priorities. As seen in the picture below, this part is divided in redesign and re-imagine that both go further beyond the conventional thinking and production. By redesign the authors refer to new ideas dealing with different issues concerning product design, e.g. material choices, environmental friendlier production procedures, end-of-life solutions etc. whereas re-imagine extends the focus to the whole way of life and consumption patterns of whole societies including housing, traffic, energy production etc.
This phase that Esty and Winston describe as new priorities can easily be compared with Willenius´s idea of a network society described in the picture somewhat earlier. According to him, this phase is based on producing more but something different and in another way. It can also be described as so called need oriented thinking which is, in turn, based on changing consumption patterns and infrastructure. The approach is a more holistic one, striving to act in a sustainable way in every aspect of economy, business, production and life in general which means that the change in thinking has significant impacts in all parts of the society. The focus is on global satisfaction of needs instead of just material welfare.
One way to produce something different in another way is to complete or replace a physical product by various services. Researchers have divided and categorized different types of services in different ways. In this chapter two groupings or strategic options are introduced and discussed. But, before describing these options in more detail, a few comments on services in general might be needed.
Services can be determined in various ways and it can refer to many different things. For example, a service may refer to the role of the service sector in the economy, or to offerings of a company to its customers, or to the service or utility provided by a physical product (Heiskanen & Jalas 2003). Services can also be defined as including, in addition to a repeatable, standard component, a singular component per transaction (Kotler 1997). In addition to services performed by human labour individually to for each customer, there are also several kinds of so called technology-based services like search engines etc. A broader definition could be to define services as economic activities that replace the customer´s own effort with activities performed by the service provider, either personally, automatically or in even in advance, e.g. through planning and design. From the environmental point of view, services may also be seen as ways to include the use and disposal of products within the environmental management of a company by means of e.g. cleaner production, better material efficiency and eco-design. Based on the idea of paradigm shift, certain environmental requirements can be set also for services and therefore terms like eco-efficient services and sustainable product-service systems have been used in academic discussion. They can be seen as part of macro-economic concepts such as ecological restructuring (Spaargaren and Mol, 1992) and the customized economy (Schmidt-Bleek and Lehner, 1999 in Heiskanen & Jalas 2003.) which has very much in common with Willenius´s idea of doing something different in an other way. Sometimes it is difficult to make a clear differentiation between products and services because almost all products include at least some service components and most services require the use of at least some products.
Apart from environmental point of view, which will be the focus later on, services can be divided and grouped in several ways. For example Grönroos (2007) divides services into services that can be invoiced and, on the other hand, to services that cannot or at least are usually not invoiced, which he calls unbillable or hidden services. Both of them can be an effective way to gain competitive edge on the market. The same way Porter introduced three strategy options already in the 20th century: price/cost based competition, product differentiation and niche-markets, Grönroos (2007) mentions four strategic perspectives that base on either the product, price, image or services. The so called product based perspective relies, like the name describes, on the core product itself. In this case the quality of the product is seen as the main source of competitive advantage whereas the role of services concerns first of all customer relations and cannot be seen as a strategic approach. Nowadays however, it might be difficult to compete only by means of the product itself unless the product or the technology the company uses is somehow far more advanced than that of the others, or unless the company has continuously lower costs. Companies that implement the product based strategy without having a technological advantage, often have to compete with price which is never a sustainable competitive edge because as soon as competitors can offer a lower price, the customer is gone. The price based viewpoint is often chosen in situations when price is clearly the major purchasing criteria of the customers. This strategy option can be beneficial as long as the company can keep its costs on a lower level than the others, otherwise the profit margin gets so small that the company cannot invest in its future any more. The third strategic perspective is based on the image of the products or brands that have been created by marketing communication. Image is also seen as the most important purchasing criteria of the customers. In some businesses like fashion, perfumes, soft drinks etc. this approach has been effective. To be successful on the market, this strategy requires a successful product and, above all, packaging and marketing communication that support the marketing strategy. When the competitors offer products of the same quality and/or price, the products can be differentiated by services, either by services that can be invoiced like logistics or maintenance, or hidden services like invoicing, advice, personal attention etc. The product and services linked to it build together a complete service package which is sold as a service even though it is based on a physical product. According to this so called service based perspective the role of services is strategic and it can be adapted by all companies, regardless of whether they offer physical products or services, or whether their customers are private consumers or other companies. These four options do not exclude each other. For example choosing a service perspective as the main strategy does not mean that less attention should be paid to other aspects e.g. production technologies or quality. On the contrary, due to the strong competition in most industries and in most markets, companies are required to develop a better product platform for a service based competitive edge. The chosen perspective, however, determines in which direction the company is willing to develop its resources and competencies. (Grönroos 2007, 1-8.)
One should also remember that services are usually produced and consumed at the same time, and that the producer usually works more or less together with the customer. Pleasant experiences lead to a service relationship and sometimes even to customer loyalty. Loyal customers are normally, but not necessarily, profitable customers. Therefore managing relationships with customers can be seen as a profitable approach for service companies as well as for companies providing both physical products and services as part of their package. Companies that have chosen the services based perspective usually have often no option but to focus on management of customer relationships as well as on stakeholder cooperation concerning e.g. suppliers, financiers, share holders etc. Thus, understanding relationship marketing or marketing based on customer relationships becomes a requirement for understanding how to manage a company in service competition. (Grönroos 2007, 8.)
As mentioned before, services can be categorized in different ways. Here, two examples of service classifications are chosen due to their environmental point of view. First they are introduced and described, then combined and finally compared with the paradigm shift discussed earlier.
Heiskanen and Jalas (2003), for example, introduce four different meanings of the service approach found in the current discussion: eco-design with service approach, product based services, result oriented services and non-material services. The first one, eco-design wit service approach, can also be called functional design which means that here the service is seen more as an utility that the products provide to customers rather than as traditional services. This type of services that are needed already before manufacturing is included also in Grönroos´s grouping that will be introduced later on. From the environmental point of view the aim of this re-design of physical products can be e.g. to manufacture products that need less material, use less energy, use renewable energies instead of fossil fuels, can be re-used or recycled etc. According to Heiskanen and Jalas (2003), such new solutions may be developed in traditional manufacturing companies, but often these new product concepts differ so radically from the existing ones that they are launched in the market by new competitors. Nowadays companies, both traditional manufacturers and new pioneering companies, spend large amounts of money to find new environmental friendlier product concepts and innovations.
The second group, product based services, also has a physical product as a starting point, but, apart form the previous one, the service is usually provided either during or after the production, mostly during the use or consumption. Here, the object of purchase is not (only) the physical product but (also) its use, sometimes also some assistance in its use. Product-based services can include e.g. repair and maintenance of the product in question, or be related to updating and/or upgrading of it. Different solutions in the field of product take-back and product recovery as well as various types of rental and leasing services could also be included in this service category. The aim of these services is, naturally, to lengthen the life time of physical products and thus decrease the material and energy use needed in the production. In addition to this, shared use often enables more flexible use when the customer can choose from a larger sortiment of products the most suitable one for each task at hand. He may also be more selective in his use of the product and use alternative options (e.g. public transport instead of a shared car) when appropriate. On the other hand, with more intensive use the product can provide the same number of services as when owned by a single user, but also be "used up" in a shorter time. A positive point here is, however, that providers of product-based services automatically get their products back after each use, which enables a more effective and systematic reuse and/or recycling of the products or components. These services are actually nothing new, on the contrary, earlier it was a common habit to repair and maintain almost everything, from ones personal clothing to tools and machinery. One could rather see it as a kind of come-back of high quality products and repair and maintenance services. What is new here, is public attitudes towards long-gone consumption patterns: consumers buy less but higher quality, have their equipment and machines repaired instead of buying new ones, purchase second-hand products etc. New development is also that different rental and leasing services are nowadays offered also by traditional product manufacturers, either in addition to conventional production or instead of traditional product offerings.
Services that fulfill customers´ needs by providing the same results in another way, are called in this classification result-oriented services. From the environmental point of view the aim of these services is to fulfill customers´ needs more eco-efficiently than before through superior planning, training and redesign of the chosen activities of customers, for example energy consumption. Typically the service contracts are based on the achieved results, not on the amount of products or services delivered. The same way as product-based services, result-oriented services can also be provided either by an original producer, or, more often, by a completely different company or at least a different business unit than the one producing the product they replace. (Heiskanen & Jalas 2003).
The fourth group in this classification is called non-material services. The name itself tells the basic focus of this service category: instead of physical products the primary objects of market transactions are different kinds of services. Despite of this, one should keep in mind that the delivery of most services requires at least a supporting infrastructure. According to Heiskanen and Jalas (2003), in the context of ecological modernization and ecological restructuring, services are mostly understood as traditional or new service sectors. Therefore the non-material services discussed in this context are usually not seen as alternatives to physical products. Instead, the dematerialization development is based on decline of traditional manufacturing as well as on growing importance of knowledge intensive production and, potentially, changes in consumers´ lifestyles and preferences. Thus, the arguments concerning non-material services are mostly related to the whole structure of the economy by making the de-linking of economic output from material throughput possible – but this, naturally, depends on the potential changes of consumer behaviour and extensive changes in the structure of consumption. (Heiskanen & Jalas 2003, 188-189).
From the environmental point of view, based on ecological restructuring and dematerialization, services can also be categorized in three strategic options: Product-oriented, use-oriented and need-oriented services. (Pesonen 2008). The first group, product-oriented services, can be regarded as services that somehow add value to physical products. This may be done by e.g. maintenance, insurances, training of the users of the products etc. The overall aim of these kinds of services, shortly, is to extend the life time of products and to take into account the product´s end-of-life phase. This kinds of solutions are actually nothing new. According to Grönroos (2007), today almost all producers of physical products offer their customers also services. In most of the industries only less than 10 per cent of all employees work for physical production, the rest is paid for producing different services. There are numbers of companies that charge over a half of their turnover for different product based services. They can be divided into five groups:
a) services that are needed before manufacturing, e.g. financing (whether services concerning financing aspects should be regarded as product based services, can be discussed), R & D, design etc. One should keep in mind that both, R&D and design, play a very important role also in the third service category, need oriented services, which is discussed in more detail later on in this chapter.
b) during manufacturing, e.g. financing again, quality assurance, safety, maintenance etc.
c) sales, e.g. services concerning logistics, distribution network, production and delivery of information etc.
d) during consumption and use, e.g. customer guidance, software updates, maintenance, invoicing, handling of reclamations, etc. These two, invoicing and reclamations, can also be seen as examples of so called hidden services, which means that they are usually regarded as routine tasks of administration, finance or other departments rather than as services. They can, however, be transferred to useful services for customers when they have a positive influence on the customer perceptions concerning the company and, in a long run, on his/her purchase decisions.
e) after consumption and use, e.g. waste management and recycling. As mentioned before, different types of solutions concerning end-of-life products have become an essential type of services and business. (Grönroos 2007, 1-3).
Services like information production, software updates, logistics, professional guidance etc. can either be offered and invoiced as separate services or together with the physical product. They can also be, partly or completely, outsourced. Whether outsourced or not, however, they offer a strategic opportunity to keep and improve the competitive edge of companies.
One should keep in mind, however, that customers do not buy products or services, they buy benefits or solutions that products and services provide. They buy solutions including a variety of products, services, information, personal attention and other components that should build a positive experience on customer´s mind. In other words, customers do not buy products or services as such but solutions that meet their own needs. When these needs can be met by offering services without selling physical products, one can talk about need oriented services that are described later on in this chapter.
One can easily see that this category is very close to the idea of eco-design with a service approach introduced earlier. The main focus is on the physical product, the role of different services is for example to complete the product, lengthen its life time and to gain competitive advantage by offering a whole product-service package to customers (and by doing so, to make the customer more involved and depended on the company). The potential to eco-efficiency and dematerializing is based mainly on technology but also on shifting parts of human labour and effort from customers to the service provider. The same way, services concerning e.g. sales including distribution network and information production as well as customer guidance, software or maintenance during the use or consumption can be included in the product based services as well. The same goes also for product recovery and waste management services after the use.
The second option, use-oriented services, is based on the idea that instead of buying a physical product the customer pays for using it. In practice, this means most often renting, leasing or sharing different products. In this case the producer maintains the ownership of the product and is paid by the client just for providing the agreed results. In other words, this kind of services do not require the client to assume (full) responsibility for the acquisition of the product involved, on the contrary the customer benefits by being freed from the problems and costs involved in the acquisition, use and maintenance of required equipment and products. On the other hand, the selling company is motivated to minimize the energy and material consumed by optimizing their use because payment is based on the unit of service, not on the unit of consumed resources. It also makes it possible to maximize the use of the product in question because fewer products need to be produced and thus the manufacture costs can be saved. Other benefits are that repair, maintenance, upgrading and other actions extend the life time of the physical product which postpones the disposal costs as well as the costs of producing a new product. In addition, it motivates the company to reuse collected components from disposed products. It is also possible to extend material life through recycling, combusting or composting which, in turn, reduces the need for landfilling, saves waste management costs and could limit the need for new resource acquisition costs. In addition to environmental benefits, use oriented services can also contribute to global social responsibility and equality between people in developed and developing countries by providing access to scarce or previously unavailable goods in developing countries. There is, however, also a risk involved: customers may be more careless when using a product they do not own themselves. Therefore, it is important to take this possibility in concern when making the contract. (Pesonen 2008). These use-oriented services are easy to compare with product-based services introduced in the earlier classification. Heiskanen and Jalas (2003) have found some scientific research results that support the enhanced eco-efficiency of use-oriented services compared to traditional individually owned products: For example the average environmental impact of customers sharing a car seems to be about 30% lower than that of car owners (Goedkoep et al. 1999); the use of rental skiing equipment consumes about half the resources of user-owned equipment (Hirsch et al. 2001); if all the books loaned each year from public libraries in Finland were replaced with user-owned ones, 32000 tonnes of paper would be needed leading to e.g. 13800 extra tonnes of CO2 emitted (Mäki 1999). However, there are some issues to be considered,too, when comparing the eco-efficiency of use-oriented (product based) services to private ownership of products. First, the life time and durability of products may depend on the way products are used (uncarefulness, misuse); second some additional transport may be needed whereas owned products would be readily available etc.
The third option, need-oriented services introduced by Pesonen (2008) could be seen as part of Wilenius´s third phase where the aim is to produce something different and in an other way which was discussed earlier. Here products are replaced by services (at least to some extent) completely. This, naturally leads to dematerialization which, of course, benefits the environment significantly. Whether traditional laundry, massage, hair dressers etc. can be mentioned as an example of this kind of services may be worth considering, but what may be even more interesting are the new business ideas and concepts that have been created to fulfill customer needs by offering a service instead of selling physical products. The basis of need-oriented services is pretty close to the one of non-material services introduced earlier.
These need-oriented services may be seen to include also the so called result-oriented services of Heiskanen and Jalas´s classification (2003) where result-oriented services are claimed to replace the acquisition of a product with a professional service delivering the desired result. In other words, tasks that were previously conducted by the product owner or user are transferred to professional service providers who are supposed to know about the relevant technologies and have access to better equipment. Tasks may be performed by a better trained and a more competent person than the customer. One example of these services could be different ESCO (Energy Saving Concepts) or MASCO (Material Saving Concepts) companies that make their living by identifying the energy or material saving potential of the customer and by delivering them a whole energy or material saving project including the planning, execution, financing and technical feasibility of the project. The savings are shared between the selling company and the client.
To be successful, strategic service concept require, naturally, managerial vision for the innovation which has to be supported by an innovative corporate culture. On the other hand, issues that sometimes act as barriers to adopting strategic service concepts incorporating environmental aspects to business strategy may be e.g. difficulties of quantifying the savings (both in economic and in environmental terms) emerged by these strategies and thus difficulties in marketing the service innovations to the customers. There might also be a potential risk of services being easily replicated by a competitor, in some cases even more easily than that of a physical product. Difficulties in adopting strategic service concepts may also be different in developed countries from those in developing countries. In developed countries, the biggest barriers may be e.g. the cultural shift from owning the product to have one´s needs and wants fulfilled in an other, more sustainable way, whereas in developing countires the main difficulties may be e.g. lack of external infrastrucutre and technologies as well as availability of knowledge and advanced technological information to shift to service concepts.
As mentioned before, to be successful, corporate sustainability strategy must be integrated into corporate strategy and all core business activities e.g. accounting, marketing, logistics, supply chain management etc. It can not function as a separate, independent activity.
Strategy as a term is very comprehensive and many sided. There are numbers of determinations for strategy. According to Minzberg et al (1998), strategy can be seen as a plan when all actions are planned and intented. It can also be ploy with which companies mislead their competitiors to a wrong direction and beat them. It is also a pattern that makes company actions consistent. It also means market position and a way to position the company on the market. Strategy can also be seen as a perspective and collective description of the existence and goals of the company. (Mintzber et al. 1998: 9-21).
Strategies can be classified to intended vs. implemented. Strategies can be planned in advance by the management or it can be a result of negotiations and compromises. Not all intended or planned strategies are implemented or come true as planned. There are factors inside and outside of the company that may change the direction of the intented strategy when the result may also differ from the original intention. (Mintzberg & Waters, 1985).
Sustainability strategies are made on many levels, and it has often been said that to be successful lower level strategies should be based on higher level strategies. Examples of global level strategies could be e.g. UNEP (United Nations Environmental Programme), UN Millennium Declaration etc. to mention just a few. They build certain guidelines and frames for example for EU-level strategies, national and regional strategies as well as for strategies made within different industries (e.g. Responsible Care in chemical industry). Despite of the dramatic failure in Copenhagen summit for climate change, countries, regions and individual municipalities keep developing e.g. their own climate strategies to fight the climate change (and/or to adopt to it). On individual corporate level the company strategy defines e.g. the governance, function and form of the company. It also includes issues like business portfolio decisions, product-market decisions as well as decisions concerning technology use and development. Different functional strategies, e.g. product, marketing and human resources management strategies, are based on the business strategy of the company, which, in turn, determines e.g. the decisions concerning competitive strategy options in general. Strategic management can be seen as a continuous strategy process (Minzberg xxxx): 1. Strategic analysis, 2. Development of the strategy, 3. Implementation of the strategy, 4. Assessment of the strategy.
In this chapter strategic analysis is discussed in more detail whereas to the rest of the strategy process less attention will be paid. This relies on the fact that development, implementation and assessment of the chosen strategy can be seen as rather similar regardless of what kind of strategies they concern, while the strategic analysis contains more differencies and food for thought, so to speak, in comparison with conventional strategy process. For the same reason, the focus here is, naturally, especially on sustainability strategies. When thinking of strategic decision making including also environmental issues, one should always keep in mind that irrespective of whether managers are concsious of it or not, almost every business activity causes some kind of environmental effects that can induce reactions and influence business development. It can be said that envrironmentally oriented business management aims to reduce these environmental impacts by adapting its products, organisational processes, organisational structure, stakeholder cooperation, business conduct and performance towards environmentally benign activities and away from environemntally damaging activities. (Schaltegger et al. 2003, 28). Even though the name of the whole champter is Implementing the Green Strategy, one should keep in mind that CSR strategies should always cover also the social responsibility aspects as well, not only the environmental point of view.
Like any other strategy process, the development of sustainability strategy should start with a strategic analysis. A good starting point is the business purpose which determines why and what for the company is on the market; in other words it forms the very core of the strategy including the product, market and client decisions. Strategic planning determines also the long-term goals of the company and identifies the operational environments where the company wants to act. It can also include the required skills and resources that the company needs to achieve the desired market and to succeed in the competition. One should also keep in mind that the strategic process is usually based on social expectations: employees expect to work and receive rewards for it, financers expect companies to achieve certain levels of profit and turnover, societies expect companies to pay their taxes etc.
When it comes to corporate responsibility issues, e.g. environmental issues, the first choice the company has to make is on which market it wants to compete, in other words, does it want to enter the market of environmentally friendly products or, instead, stay on the field of conventional products and services. (Belz and Peatty 2009).In case of sustainability it often happens that the strategic goals of them are formulated as "add-ons" to the main business strategy and just made to fit it. Sometimes environmental goals, the basic business strategy and long-run business goals remain separated so that changes in one are not considered to cause any changes in the other. In that case environmental performance is seen only as separate actions with no stronger linkage to corporate code of conduct, other functions of the company or potential competitive advantage that remains unachieved. Therefore, it is essentially important that environmental and other corporate responsibility issues are tightly integrated in the basic strategy and all functions of the company. The aim is to integrate environmental goals within the strategic planning process in order to link them to the competitive strategies as well like potential low-cost leadership or differentiation strategies that can provide the company with a competitive advantage while maintaining or improving credibility among stakeholders. (Schaltegger et al. 2003, 176-179).
The next step could be the analysis of the business environment. This can be done in many ways using various tools. A traditional way to analyse the company performance in relation to the business environment is to make a SWOT-analysis. This analysis can be used to highlight both opportunities for the business as well as the vulnerability of the business. The analysis has two dimensions: on the one hand the internal analysis evaluates the internal competences and resources available as well as the potential constraints on achieving strategic intentions. In other words, it aims to reveal the strengths and weaknesses within the company. On the other hand, the SWOT-analysis aims to find out the external opportunities and threats by comparing its own strengths and weaknesses with those of competitors in order to find any competitive advantage or disadvantage of the own company. A SWOT-matrix can be then used to merge the analysis of the internal and external influences and key internal considerations. Strategic options can be deduced and selected based on the SWOT-matrix. Basic strategy specifies the general orientation, in other words, whether the company should choose a defensive or an offensive basic strategy in order to be able to achieve its goals. The choice can be based not only on economic but also on the environmental performance of the company. The extent to which competitive advantage can be gained by improving the environmental performance of the company and the environmental quality of its products can be defined in the company competitive strategy which will be described later on.
From the corporate responsibility point of view, potential external threats indicate how strongly the business is affected by e.g. public, media, customer and government expectations etc. about the environment whereas potential opportunities arise from demonstrable solutions to environmental problems and customer preference for environmentally friendly goods. For example public pressure can lead to the rejection or banning of environmentally harmful products (threat) whereas opportunities can be turned into competitive advantage and new market opportunities based on enhanced environmental performance, technical competence in environmental issues, strategic partnerships and stakeholder credibility. Next, a few examples are described here. First, in a situation where the external threat is estimated to be relative serious but the possibilities of the own company are rather small the company can adopt a defensive strategy. In cases where the threat is unjustified the company can try to influence the public opinion by for example asking for a statement of an external specialist, or by improving the relationship with its stakeholders and thus reach better credibility and reliability by means of e.g. exact targeted PR-activities in order to limit any decline in image. A final option for a company is to close itse operations and move to another region where resistance is texpected to be weaker. This requires, naturally, that the closure or departure takes place before stakeholder pressure is escalated or the customer base and reputation are lost. In addition to economic reasons, environmental issues are claimed to be one of the other reasons why companies with high environmental impacts keep moving their productions to developing countries. As long as public attention is not aroused or the external threat is otherwise only limited the company may have time enough to observe the operational environment and change its actions only if and when needed, for example traditional business fields are re-evaluated only when environmental laws get stricter or public opinion changes. Schaltegger et al. (2005) call this strategy an indifferent strategy. One form of it could also be reducing material and energy consumption and lowering the volume of waste without any additional expenditure on investment just because of cost savings which can, however, enhance the potential opportunities of the company if and when the public attention and stakeholder requirements concerning the environmental performance of the company grow in importance. On the other hand when the possibilities of the own company are good but the external threat is high the best way to succeed on the market is to find new innovations and offer the customers e.g. new, more environment friendly products, services or production procedures. New market opportunities and competitive advantage can be gained by expressing the importance of environmental matters and, at the same time, the high level environmental performance of own company. The most ideal situation from the company point of view might, however, be when own possibilities are good and external threats only small. In that case the company can implement an offensive strategy where the offensive basic strategy strengthens the profile of the company and its products. In this case the differentiation of the company and/or its products as well as concurring new markets or expanding own market shares are at the easiest. (Steger 1988, Schaltegger et al. 2005, 176-184).
In addition to analyzing the current competitors and their role on the market, the company management should pay also attention to the whole operating environment including the whole supply chain, possible new market entrants and the surrounding society. Requirements for corporate responsibility issues may emerge either upstream or downstream when companies are supposed to expand their responsibility requirements to cover the whole supply chain and the life cycle of their products. On B2B markets customers who emphasize on environmental responsibility often require their suppliers the same. These requirements may include e.g. adapting a certain code of conduct, a certain environmental certificate etc. In some cases suppliers may have several big customers which have each different codes of conduct which means, in turn, that the supplier should adapt several different codes at the same time - which may, naturally, cause certain problems. In emerging economies as well as in a number of developing countries an environmental management system or an environmental certificate may also be seen as a way to get to the western market. Responsibility requirements may also come from suppliers: when the demand of raw materials iexceeds the supply, suppliers may have a chance to select their customers. Usually this happens, naturally, by means of pricing, but in a situation when the supplier wants to achieve respect and good reputation it may prefer delivering to partners that are reliable also from the environmental point of view and thus do not risk their own image. One big question mark is always the potential new market entrants. They may penetrate the market either by competing with the same product, or a differentiated one that fulfills the same customer needs than the existing ones, or, sometimes, by a completely new business concept which also strives to meet the customer requirements and needs but in a different way.
When it comes to analysing the future, companies should figure out for example what customer benefits they should provide. what new competencies will then be needed, how they can be received, and how the customer interface needs to be reconfigured. (Grönroos 2005, Hamel & Prahalad 200x). It has been claimed that it should be companies that focus in the future because the customers are notoriously lacking foresight. Whether this concerns also environmental and social responsibility issues can be discussed, but one can hardly say that future speculations are not important to all companies. Hamel and Prahalad (200X) distinguish three kinds of companies concerning their future plans: a) There are companies that try to lead customers where they do not want to go which could mean, for example from the environmental point of view, that companies try to market environmentally benign products to customers for whom environmental issues are either unimportant or even have a negative impact on their purchase decicions. Or, on B2B market, customer companies are either not interested in or want to ignore company responsibility issues and change the supplier as soon as possible in case the responsibility requirements are considered to be too high. b) The most traditional and most widely used approach is probably the situation where companies listen to customers and then respond to their articulated needs. The weakness of this strategy is apparently that it focuses on the present needs instead of future needs. c) Comapnies can also seek answers to questions of tomorrow, so to speak, by leading customers where they want to got but do not know it yet. (Hamel & Prahalad 2000x). Environmental issues can be seen as a practical example of this approach. Smaller companies as well as private customers very often - still - lack of relevant knowledge and understanding of the complex of environmental and social problems we are facing as well as of the impacts of their own actions on the existing problems. In that case forerunning companies may have a decisive role in turning the development into a more sustainable direction.
One should also bear in mind that business environment never lives in a vacuum. They are always surrounded by a society, a village, a city, a country - or in case of multinational companies several countries and cultures with numbers of cultural impacts and different legislation and regulations. These aspects are discussed more widely in Chapter Corporate Responsibility.
As we know, the so called basic strategies cover the whole operative environment including the stakeholders of the company whereas the so called competition strategies focus on the market and the economic business environment. In order to gain competitive advantage, the goals, strengths and weaknesses of competitors are evaluated. There are various ways to analyze it. For example Porter´s three strategic options have become almost a classic: The company can compete by low prices and/or low costs, or differentiate the products from the others, or compete only on narrow niche-markets. Schaltegger, Burritt and Petersen (2005) divide so called competition strategies in four groups based either on costs, product differentiation, mass markets or on market development strategies.
It is easy to see that the cost strategy is based on cost savings. Very often the competitive advantage is related to the leading position concerning either product or service quality or costs. From the environmental point of view lower costs might be reached e.g. by more efficient use of materials and energy, minimizing transportation and waste management costs, recycling materials, parts and components etc. The environmental cost leadership strategy grows in importance e.g. when prices of primary resources, building land, emissions and waste management increase. It can be claimed that to gain competitive advantage, the performance and price must be important to the customer, they must be made apparent to them and the products must be permanently available, e.g. through know-how that is difficult to copy or by means of trust that has been developed over time with the customers. In any case, market opportunities based on price and/or cost leadership can be successfull only when they base on the strengths of the company such as technical know-how, high-quality services or excellent reputation and credibility. The functionality of cost strategy can be evaluated only if the environmental costs and savings related to them can be identified and systematically calculated. One should, however, keep in mind that only some environmental costs can be easily measured (e.g. energy and material consumption) whereas others can be calculated by means of quite complex allocation procedures. In addition to this, there are certain environmental costs that are very difficult to measure by monetary means, e.g. spoiling the landscape, polluting the air, decreasing the quality of drinking water etc. (see chapter Environmental Accounting.) Further difficulties with measuring environmental cost take place when investments are made that meet both economic and environmental goals. As long as actions concerning environmental issues are seen as costs or cost savings the strategy can be regarded as defensive. The most obvious weakness of this strategy is that cost savings are biggest in the implementation phase of the strategy; later on it gets more difficult to find same scale savings. (Schaltegger et al. 2005,187-190). Low prices, in turn, are very seldom a constant competitive advantage because as soon as a competitor can offer a lower price the customer is gone. (Grönroos 2007, 5). (Price setting of environment friendly products see chapter Sustainability Marketing.)
Where the previously described business cost reduction strategy should reduce the expenditure on inputs, a product or service differentiation strategy focuses on the outputs of the company. It aims for, shortly, increased sales turnover. It can be increased when a) when prices can be raised so that at the same time the sales volume does not decrease, b) when the volume of sales grows and the price can be kept the same, or c) when both of these situations occur. When the cost leadership strategy was described as defensive, the environmental product differentiation strategies adopt the opposite way an offensive approach. Schaltegger et al. 2005, 190-191). This means that, due to environmental (or sustainability) requirements of different stakeholders, companies strive nowadays to differentiate their products e.g. by making them somehow more environment friendly or otherwise more sustainable. With help of the so called product differentiation strategy companies aim at making new environmental innovations and finding new markets for them. This strategy has traditionally been used for environmental friendly products and services on narrow niche-markets. These niche groups are usually regarded as people with strong environmental and/or social responsibility preferences, and often also with above-average income and wealth because the prices of niche suppliers are usually set above the price of comparable conventional products. A pre-assumption is also that these niche-consumers have time, willingness and ability to look for purchasing opportunities and to obtain knowledge of the products, their quality and their environmental impacts. However, as long as environmentally friendly products are sold only on narrow niche-markets, the environmental improvement of product and service innovations will remain limited. According to Schaltegger et al. (2005), there are two optional ways to achieve an environmental mass market. The idea refers to the biblical story of david and Goliath. Davids are small niche-suppliers with high environmental quality products whereas Goliaths describe the mass marketers which usually serve only the so called mainstream with their conventional products. On the one hand, niche-suppliers can try to expand their offerings to the mass market by e.g.expanding their production or uniting several actors through co-operative ventures in order to gain economies of scale to overcome cost disadvantages. This can be called 'multiplying Davids'. On the other hand, large distributors can decide to expand their mass market to include environmental qualitative products. This strategy, in turn, can be described as 'greening Gliaths'. Naturally, in reality, there are also other actors between these extremes, for example suppliers who try to improve theri environmental quality and raise the volume of sales at the same time. (Schaltegger et al. 2005, 190-192).
One should not forget, however, that both price and differentiation characteristics of a product can turn into a competitive advantage only when they are noticed and appreciated by the customer. Price and product differentiation characteristics can be brought to customer attention e.g. by product positioning. In its positioning strategy the supplier defines the profile of its products in comparison to the competing products available on the market. As described in more detail in Sustainability Marketing - section, the product that is seen as the most serviceable, in other words the one that provides the best cost-benefit - balance, is most probably the one that will be purchased. The purchase decisions may be based on various issues: high quality, attractive design, good after-sales service, reputation of the supplier, credible product information easily available, environmental friendliness etc.
When the product can not be differentiated enough only by developing its physical charasteristics, competitive edge can be reached by various services related to the original product. It may be difficult to gain competitive advantage based on a company's core product, unless the company has a stable technological advantage or continuously lower costs. Therefore, a whole service package can be created based on the physical product to serve the customer better than the competitors with a product of the same price and quality. One should keep in mind, however, that customers do not buy products or services, they buy benefits or solutions that products and services offer. They buy solutions including a variety of products, services, information, personal attention and other components that should build a positive experience on customer´s mind. In other words, customers do not buy products or services as such but solutions that meet their own needs. (Grönroos 2007, 5-7).
How the market share of environmentally friendly (or otherwise more sustainable) can be expanded to reach the big majority of customers, is a rather difficult question. Even though the amount of so called ethical consumers and ethical consumption in industrial countries have been growing and thus also the demand for environment friendly products has been increasing, the segment of so called green, ethical, responsible (or what ever description one wants to use) customers or consumers can still be regarded as rather small. In many cases they can still be seen as a niche-market compared to the amount of customers of conventional products. Naturally the proportions and relations of different customer groups vary from product to product and from industry to industry, but, in general it may take some time before ethically or environment benign products reach the demand of conventional ones. (Segmentation and customer behaviour see chapter Sustainability Marketing.)
It can be claimed that at the present, our socio-economic environment and institutional design do not really support sustainable behaviour. Therefore changes are needed not only in public and political institutions but also in consumption. The more social and political institutions favour sustainable consumption, the easier it is for companies to market sustainable products beyond niches and affect also the public opinion. Strategies that aim at influencing the whole society can be called market development strategies (Schaltegger et al. 2005) or transformational sustainability marketing or kind of 'mega marketing' (Belz 2005). These strategies aim to reduce barriers that limit the potential sales turnover of environmentally friendly products and services in the sociocultural, legal and political environment of companies. In other words the objectives of these strategies are to make institutional changes that either set positive incentives for the purchase and use of sustainable products, or set negative incentives for the purchase and use of conventional products. Market development can include issues like environmental awareness and consumption habits, infrastructure barriers that e.g. do not support public transportation systems, development of transparent, reliable and generally valid quality standards, correct product information and sustainability labels, lack of competition because of monopolies, bureaucratic hindrance to environmentally oriented businesses in the service sector etc. Concrete examples of public support for ecologically more sustainable solutions could be e.g. ecological tax reform, voluntary agreements on socio-ecological industry standards, development of sustainability labels which create transparency in the market, public campaigns and lobbying industries and/or services with higher environmental performance etc. (Belz 2005, 19-21, Schaltegger et al. 2005, 192-193).
Eventhough So called blue ocean strategy does not necessarily have anything to do with sustainability, it could be mentioned here as a good example of innovative strategy building. The basic idea is, according to Kim and Mauborgne (2005), that companies strive to find innovative solutions and new markets with no (or at least only little) competition. In their thinking innovations must also provide some kind of added value, otherwise there is a danger that innovations remain only technical innovations which can be followed by competitors. Instead, this kind of value-innovations mean a new of thinking and implement a strategy which leads to unique market position. Therefore, it is nicely in line with Wilenius´s idea of doing something different in an other way (described earlier in this chapter). Blue ocean approach also challenges the traditional model of Porter (1996) where companies strive either to create more value for customers with bigger costs or compete with lower costs when the new value remains more modest. In fact companies that try to create blue oceans strive to both, product (and/or service) differentiation and low costs at the same time. In addition, blue ocean strategies are based on the assumption that market borders and the structure of industries are not taken for granted but, on the contrary, actors on the field can change them by their actions and attitudes. Traditionally it has been seen that product differentiation cause costs because companies usually use the same best practices in their competition are have, therefore, to choose between product differentiation or low costs. Blue ocean strategies aim at creating new best practices and new ways of thinking and acting. (Kim & Mauborgne 2005, 34-39)
Shortly, the differences between traditional competition and blue oceans could be described as follows: A company can reach an uncompeted market area by emphasizing matters that have influence on customer purchasing decisions irrespective from the field of actions. (Johnson & Scholes, 2002: 132-134). In traditional competition companies focus on their competitive position in one strategic group, i.e. companies in the same industry using the same strategies, whereas blue oceans take all groups of the field in concern. (Grant 2002: 127). Innovations can also be found by examining buyer groups and chains whose memebers have direct or indirect influence in customer purchasing decisions. If the common assumption of target customers is challenged, new customer groups may be found. New value for customers can also be created by developing different kinds of completing products and services that meet customer expectations. (Johnson & Scholes 2002: 132-134, see also Grönroos 2007). Traditionally companies tend to think that in certain fields or industries customer purchasing criteria are based on rational decision making and therefore the competition focuses on price and efficiency, whereas in some other fields purchasing decisions may be based more on emotional issues. New innovative approaches may be created by questioning these differences.In addition, the traditional approach is to adapt to new trends as soon as they are seen whereas creating blue oceans is based on the idea that trends can be influenced by companies themselves. New blue oceans can thus be created by recognizing and evaluating weak signals. (Kotler 2004: 205-207, 681-682).
As in any strategic decision making, the chosen strategy must be evaluated and developed further. Whether it should be seen as a separate phase in the strategy process or as an integrated part of strategic analysis, can be discussed. In any case, in order to act in a consistent way, decision must be made about the strategic direction of the company. This means in practise defining optional routes for action, in other words, defining how the desired goals can be reached. In some cases also several optional strategies can be analysed and evaluated.
Based on the analysis of company´s strengths and weaknesses, opportunities and threats as well as on the analysis of the current (and future) market situation, the company can start building its strategic strenths, success factors and key competencies it needs. To have success in implementing the chosen strategy, especially if any bigger changes have been made compared to the previous approaches, organisation culture and management systems need to be developed so that they support the chosen strategy the best possible way. As the time and space are limited, issues concerning corporate culture and change management are not included in this chapter.
Regardless whether the strategy process includes corporate responsibility issues e.g. environmental strategies or not, the process should be based on continuous development. Only by closing the loop of the process it can lead to strategic learning.
Integrating responsibility issues (both environmental and social) to business activities and company strategy creates business value for the company in various ways. For example according to GEMI (Global ENvironmental management Initiative) there are six areas of value creating opportunities for environmental strategy: a) Value in Regulatory Compliance. This means that by means of responsible behaviour comapnies can protect their very basic licence to operate. In our modern society where different NGOs, e.g. environmental organizations like Greenpeace etc., are more effective and powerfull than ever before, where news can be delivered wider and quicker than ever before, where the consciousness of people related to environmental and social concerns has grown significantly, the reputation of companies and/or their products can be easily lost. And, as we all know, it takes a lot of time and effort to get it back again. By taking various responsibility issues in concern, companies can also avoid penalties followed by any negligence in non-compliance of legislation or authority regulations. b) Value in Operational Efficiency means more efficient resource and energy use, in other words, higher eco-efficiency. It may also mean reduced amount of waste which reduces also the costs of waste management and/or hazardous materials management. Increased eco-efficiency may also lead to increased productivity. Careful analysis of production procedures and supply chains (networks) may also enhance process or product innovation and thus play an important role in gaining competitive advantage for the company. c) Value in Risk Management: By means of thoroughly planned and carefully implemented environmental strategy and environmental management the company may be able to reduce it costs concerning emergency response, product liability and its insurance premiums. d) Value in Capital Investment: Nowadays also financers are very interested in responsibility issues. A good example of the growing importance of ethical requirements of investors and financers are the various ethical indexes on the stockmarket. e) Value in Market Growth: Transparent environmental strategy and its implementation is an effective way to safeguard corporate (or product) image and its brand name. High environmental performance that can be communicated to the stakeholders may help companies to expand their market share, find new customers and, in short, increase their sales. Issues related to market growth are discussed in more detail in chapter Sustainability Marketing. f) Value in Strategic Management. Environmental improvements may influence the existing product mix which, in turn, may help expanding the market share. It may also make it possible for companies to redefine and expand their market. In certain cases redefinition of environmental strategy may even lead to modification of the business mission. A seventh additional value creating opportunity could be mentioned here, too, and it is the Value in People. It has namely been figured out that environmental responsibility enhances staff motivation which, in turn, often improves their productivity. Companies with a reputation of being environmentally responsible often seem to have better opportunities to recrute more skilled and motivated employees. The same way companies that are seen as environmentally responsible are often seen as reliable partners in the eyes of other companies, too. (Pesonen 2008).